GST model may be tweaked for political viability

GST model may be tweaked for political viability

New Delhi: To sell the concept of goods and services tax (GST) to the electorate, some states are pushing for two tax rates: a low one for items of mass consumption and a higher rate for the others.

While it could complicate the structure by allowing for more sets of tax rates, politicians believe it will be easier to implement and push through their respective constituencies. The Union government and states are negotiating the contours of a GST that the Congress-led United Progressive Alliance is committed to launching by 1 April.

GST is an attempt to economically integrate all the states. Currently, states have the power to independently levy indirect taxes on some goods. As a result, some of the decisions made by companies have more to do with tax avoidance than operating efficiency, say analysts. Under GST, there will be uniform tax rates on almost all important goods and services across states.

Negotiations among states on the two rates are expected to start at 5% on items of mass consumption, to be levied separately by the Centre and states. Similarly, states are expected to discuss a rate of 10% levied independently by the Centre and states for the residual items.

Before some states floated the idea of segregating consumables and charging different rates, many states were veering towards a GST rate of 16%, with 8% levied separately by the Centre and states.

The finance minister of a Bharatiya Janata Party (BJP)-ruled state, who did not want to be identified, told Mint recently that some of the ministers had an ideological problem with a single GST rate on all consumables. How does a politician convince a voter that a bicycle and car would be taxed at the same rate, the minister wondered.

At the other end of the ideological spectrum, T.M. Thomas Isaac, finance minister of Kerala’s Left Democratic Front government, which is made up of different Communist parties, said he would like a lower GST rate on items of mass consumption.

This would, however, require a uniform rate across the country. For manufacturers and service providers, the biggest advantage of GST would be the right to offset state taxes paid on inputs sourced from another state. Therefore, the items of mass consumption chosen to be taxed at a lower rate would have to be uniform across states for companies to offset state taxes on inputs sourced from different parts of the country.

Negotiations on a uniform list of items of mass consumption are likely to be tough.

The recent twist in the GST negotiations did not come as a surprise. “The more you get into details, you realize it is a mammoth task, even conceptually," said Vivek Mishra, who deals with the subject of indirect taxes at consultancy Ernst and Young. Mishra said the recent developments were just the beginning. “It is the latest example of how difficult or how long the haul is going to be. This (two rates) is a significant departure, but it is only the first of the many we will see," Mishra added.

The state finance ministers have been negotiating the GST blueprint under an umbrella group dubbed empowered committee of state finance ministers, which meets at regular intervals. Representatives of the Central government also take part in the meetings.

Currently, the empowered committee is working on a deadline of 1 April, but since June, there have been signs that it might not be easy to make this transition.

Based on reactions from finance ministers of different states and officials in both state and Central bureaucracies after recent meetings of the empowered committee, differences seem to have arisen on account of a conflict of interest among states and the risk of making the transition without a robust nationwide information technology (IT) network.

Soon after transitioning to GST, some of the economically weaker states might see a dip in revenue as GST is a consumption tax. Therefore, some states such as Assam have asked for open-ended compensation from the Centre till their revenues stabilize as a price for giving up the states’ power to independently change tax rates.

Among economically stronger states, Gujarat has asked for an IT backbone to be in place before transitioning to the GST regime, while Tamil Nadu’s representatives have said the April deadline is premature.